House price or interest rate: Which is more important?

Two housing market shifts encourage potential homebuyers to call real estate agents: drops in housing prices and low interest rates. But deciding which factor is more important than the other can make a difference in monthly payments, the ability to move if your home value drops and HOA fees.

Monthly payment

Let’s say you started the home search process when interest rates were 7 per cent. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000 – the amount you are mortgaging after a 20-per-cent down payment and your closing costs. Your monthly payment would be $532. You decide you don’t like this payment and rate, so you wait six months and the interest rate drops to 5 per cent. However, a condo in the neighborhood you want now averages $120,000. You put down 20 per cent plus closing costs, and you are left with a mortgage amount of $96,000. Your monthly payment on a 30-year mortgage is $515. Your payment dropped by $17.

But does a payment drop financially make up for the higher down payment? Factoring in that your down payment was $4,000 more, you still save about $5 to $6 per month – around $2,100 of savings over the course of 30 years. If real estate prices never rose in your perspective neighbourhood from the $100,000 price point you started your search with – and you snagged a 5-per-cent interest rate – your mortgage would be $430. However, the volatility of housing prices and interest rates cannot be accurately predicted to move in your favour.